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School

Western University

Department

Economics

Course

Economics 1021A/B

Professor

Prof

Semester

Winter

Description

CHAPTER 9:
Consumption Possibilities:
 The budget line is the boundary between what a household can and
cannot afford, given its income and the prices of goods.
 The point at which the budget line intersects the y-axis is the household’s
real income in terms of the good measured on that axis.
 The magnitude of the slope of the budget line is the relative price of the
good measured on the x-axis in terms of the good measured on the y-axis.
 A change in the price of one good changes the slope of the budget line. A
change in income shifts the budget line but does not change its slope.
Preferences and Indifference Curves:
 A consumer’s preferences can be represented by indifference curves. The
consumer is indifferent among all the combinations of goods that lie on an
indifference curve.
 A consumer prefers any point above an indifference curve to any point on
it and prefers any point on an indifference curve to any point below it.
 The magnitude of the slope of an indifference curve is called the marginal
rate of substitution.
 The marginal rate of substitution diminishes as consumption of the good
measured on the y-axis decreases and consumption of the good
measured on the x-axis increases.
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